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Provision and Allowance for Loan Losses
Provision for loan losses is the expense related to maintaining the allowance for loan losses at a level adequate to
absorb the estimated probable losses in the loan portfolio at each period end date. Factors that influence the provision for
loan losses include:
• The impact of general economic conditions on the consumer, including unemployment levels, bankruptcy trends
and interest rate movements;
• Changes in consumer spending and payment behaviors;
• Changes in our loan portfolio, including the overall mix of accounts, products and loan balances within the
portfolio;
• The level and direction of historical and anticipated loan delinquencies and charge-offs;
• The credit quality of the loan portfolio, which reflects, among other factors, our credit granting practices and
effectiveness of collection efforts; and
• Regulatory changes or new regulatory guidance.
In calculating the allowance for loan losses, we estimate probable losses separately for segments of the loan portfolio
that have similar risk characteristics. For our credit card loans, we use a migration analysis to determine the likelihood
that a loan receivable will progress through various stages of delinquency to charge off. An estimated charge-off ratio is
then applied to each delinquency category to derive an estimated reserve rate. To determine if any adjustments should be
made to the reserve rate derived from the migration analysis, we consider current economic trends as well as the
difference between actual charge-offs and what was estimated to be charged off in recent periods. For our other
consumer loans, we consider historical and forecasted losses in estimating the related allowance for loan losses.
For the year ended November 30, 2009, the provision for loan losses increased $766.8 million, or 48%, compared to
the year ended November 30, 2008, reflecting higher net charge-offs and an increase in the level of allowance for loan
losses. Higher net charge-offs are a result of the deterioration in the current economic environment, and are discussed
further in “– Net Charge-offs” and “– Delinquencies” below. At November 30, 2009, the allowance for loan losses was
$1.8 billion, an increase of $383.3 million from November 30, 2008. This increase reflects a reserve addition related to
a 199 basis point increase to the reserve rate, partially offset by a $1.6 billion decline in on-balance sheet loans at
November 30, 2009.
For the year ended November 30, 2008, the provision for loan losses increased $861.7 million, or 117%, compared to
the year ended November 30, 2007, reflecting an increase in the level of allowance for loan losses and higher net charge-
offs. In the year ended November 30, 2008, we added $614.7 million to the allowance for loan losses to bring the total
allowance to $1.4 billion, an increase of 81% over November 30, 2007. This increase in the allowance reflects an increase
in the loan loss reserve rate due to rising delinquency and charge-off rates and loan growth, particularly in the fourth
quarter of 2008 as we retained more loan receivables from maturing securitizations on our balance sheet in response to the
inability to re-securitize the receivables as a result of the disruption in the securitization markets at that time.
The following table provides changes in the Company’s allowance for loan losses for the years presented (dollars in
thousands):
For the Years Ended November 30,
2009 2008 2007 2006 2005
Balance at beginning of year............................................................................. $ 1,374,585 $ 759,925 $ 703,917 $ 795,722 $ 910,261
Additions:
Provision for loan losses ................................................................................ 2,362,405 1,595,615 733,887 606,765 816,197
Deductions:
Charge-offs................................................................................................. (2,165,653) (1,147,241) (839,092) (852,636) (1,076,179)
Recoveries................................................................................................... 186,562 166,286 161,213 154,066 145,642
Net charge-offs ........................................................................................ (1,979,091) (980,955) (677,879) (698,570) (930,537)
Translation adjustments and other ...................................................................... — — — — (199)
Balance at end of year ..................................................................................... $ 1,757,899 $ 1,374,585 $ 759,925 $ 703,917 $ 795,722
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